How's your housing market? (1 Viewer)

[BigSteelThrill]

I agree that fear is a part of this, but why should we throw historical fundamentals out the window? Why is income/price ratio now irrelevant?

Its totally relevant.

 

[OC Zed]

People who were wrong about this will now reach for reasons outside of real estate, a kind of "perfect storm" if you will, that could never have been seen. Similar to the stock market, this whole thing...

Well, for me, I did not expect the amount of massive issues throughout the lending industry. I expected the fly by nights and the irrational lenders to go belly up but the big lenders (WaMu, Countrywide, Wachovia, etc) to weather it without having to go to drastic measures. I was flat out wrong and the result of that is that credit is not out in the market as much and underwriting standards have choked up to extremely conservative measures almost completely industry wide. That was one big mistake for me in what I was expecting. The other place where I underestimated was the amount of 'fear' that would hit the market. The fear is what keeps inventory high and people on the sidelines. When people fear the economy then they act very conservatively and they do not make big purchases. I expected a down turn. I just underestimated how deep and how long it would be.

Win some and lose some.

It's not just fear Chad. People are on the sidelines because they can't afford current housing prices, at least in San Diego. The median family income is ~ 65k; the median family home is still almost 400k.Those numbers don't work.

TG, please stop just throwing our median income and median prices together. Ignoring wealth, equity and savings is really a bad idea. I understand your point, but it still doesn't make it correct.If 100% of home buyers were renters with 0 savings for down payment, then that ratio would make perfect sense, but that isn't reality. In that link above with Mr. Mortgage, I believe his spreadsheet said that there were 12 million+ homes in CA. There were 500k+ sub prime loans in CA that I believe originated in 2004-2007 and 700k+ ALt-A loans in CA for the same period. That means that 1.2 million loans on 12 million houses, i.e. 10%, are driving the other 90% of prime loans and/or houses with no loans at all, i.e. if you look at all 12 million houses, there is probably a considerable amount of equity and as usual the idiots getting burned are the ones that jumped in, not because they needed a house or figured out what they could afford, but because they got greedy.

That isn't to say that it isn't having an affect, but CA is one of the worst places for those loans, hence all of the lenders going belly up seemingly all HQ'd there, so the 10% ratio is probably high nationally. I am just trying to point out that there is a considerable amount of fear driving the housing market in the same way that the considerable optimism was driving from 1998-2005.

This will all sort itself out and when my kids start buying houses, they will be amazed that I only paid 250k for my first house in the 1990s, just like I was amazed that my parents only paid 50k back in the 1970. And by that time, hopefully, I will be close to mortgage free like many of the baby boomers who have been in their houses for 25-30+ years are now.

These are good points, but I think you are underestimating how overleveraged California home buyers were/are. And plenty of people who didn't buy new homes refi their existing homes to take their equity out. Yes, there are plenty of homeowners here that have equity in their homes (true equity through principal paydowns), but they weren't the ones in the market from 2001 to 2007. I believe your description of the buyer with 100% (or close to it) financing is much closer to the rule than the exception.ETA: I think you are really overestimating the savings, wealth and equity of your typical California home buyer. The only people out here able to put 20% down on a home were people selling an existing home with market equity. That part of the market was wiped out once the first-time home buyer market was destroyed (not to mention most of their market equity is now gone too).

 

[[scooter]]

Along those lines... my fiances sister bought a house in the SD area about a year and half ago. Bought at $650K. When my fiance told me about this, I told her that that was not such a good idea to which my fiance replied that she knows and everyone told her this. Well, her sister called her the other day for advice (my fiance is also in the banking industry) because they went to get a HELOC and when the appraisal came back it was at $350K.

I think this may be a record.

 

[Chadstroma]

People who were wrong about this will now reach for reasons outside of real estate, a kind of "perfect storm" if you will, that could never have been seen. Similar to the stock market, this whole thing...

Well, for me, I did not expect the amount of massive issues throughout the lending industry. I expected the fly by nights and the irrational lenders to go belly up but the big lenders (WaMu, Countrywide, Wachovia, etc) to weather it without having to go to drastic measures. I was flat out wrong and the result of that is that credit is not out in the market as much and underwriting standards have choked up to extremely conservative measures almost completely industry wide. That was one big mistake for me in what I was expecting. The other place where I underestimated was the amount of 'fear' that would hit the market. The fear is what keeps inventory high and people on the sidelines. When people fear the economy then they act very conservatively and they do not make big purchases. I expected a down turn. I just underestimated how deep and how long it would be.

Win some and lose some.

It's not just fear Chad. People are on the sidelines because they can't afford current housing prices, at least in San Diego. The median family income is ~ 65k; the median family home is still almost 400k.Those numbers don't work.

I never said nor meant to imply that those are the two factors for this downturn in real estate. I only pointed to these two areas being what I underestimated in looking ahead during previous conversations in this thread. My post was only to reply to the "People who were wrong about this will now reach for reasons outside of real estate...." comment in explaining where I believe I was wrong. I have no problem coming out to admit it when I am wrong and that is what I was doing here- pointing out the areas I missed on that really materially affected my overall estimate of the future of real estate.

All that being said, stbugs had a solid post in response. Real estate is a nasty monster with many moving parts. It is not something always easy to nail down... if it was, then it would not be such a wealth generator as it is.

 

[stbugs]

People who were wrong about this will now reach for reasons outside of real estate, a kind of "perfect storm" if you will, that could never have been seen. Similar to the stock market, this whole thing...

Well, for me, I did not expect the amount of massive issues throughout the lending industry. I expected the fly by nights and the irrational lenders to go belly up but the big lenders (WaMu, Countrywide, Wachovia, etc) to weather it without having to go to drastic measures. I was flat out wrong and the result of that is that credit is not out in the market as much and underwriting standards have choked up to extremely conservative measures almost completely industry wide. That was one big mistake for me in what I was expecting. The other place where I underestimated was the amount of 'fear' that would hit the market. The fear is what keeps inventory high and people on the sidelines. When people fear the economy then they act very conservatively and they do not make big purchases. I expected a down turn. I just underestimated how deep and how long it would be.

Win some and lose some.

It's not just fear Chad. People are on the sidelines because they can't afford current housing prices, at least in San Diego. The median family income is ~ 65k; the median family home is still almost 400k.Those numbers don't work.

TG, please stop just throwing our median income and median prices together. Ignoring wealth, equity and savings is really a bad idea. I understand your point, but it still doesn't make it correct.If 100% of home buyers were renters with 0 savings for down payment, then that ratio would make perfect sense, but that isn't reality. In that link above with Mr. Mortgage, I believe his spreadsheet said that there were 12 million+ homes in CA. There were 500k+ sub prime loans in CA that I believe originated in 2004-2007 and 700k+ ALt-A loans in CA for the same period. That means that 1.2 million loans on 12 million houses, i.e. 10%, are driving the other 90% of prime loans and/or houses with no loans at all, i.e. if you look at all 12 million houses, there is probably a considerable amount of equity and as usual the idiots getting burned are the ones that jumped in, not because they needed a house or figured out what they could afford, but because they got greedy.

That isn't to say that it isn't having an affect, but CA is one of the worst places for those loans, hence all of the lenders going belly up seemingly all HQ'd there, so the 10% ratio is probably high nationally. I am just trying to point out that there is a considerable amount of fear driving the housing market in the same way that the considerable optimism was driving from 1998-2005.

This will all sort itself out and when my kids start buying houses, they will be amazed that I only paid 250k for my first house in the 1990s, just like I was amazed that my parents only paid 50k back in the 1970. And by that time, hopefully, I will be close to mortgage free like many of the baby boomers who have been in their houses for 25-30+ years are now.

I agree that fear is a part of this, but why should we throw historical fundamentals out the window? Why is income/price ratio now irrelevant?

It isn't, that isn't what I said. Do you think there is a difference between a family making 65k, who already own outright a 200k house, and a family making 65k who are renting? The former family could easily afford a 400k home, while the second could not.My point is just that throwing out the income ratio makes it look like no one in SD can afford to live there. It just ignores alot of financial info which could easily make a more expensive house affordable. When I moved 2 years ago, my income ratio almost didn't matter because the amount of money I was putting down on the house (based on the equity of my sale) was multiples of my income.

 

[[scooter]]

It isn't, that isn't what I said. Do you think there is a difference between a family making 65k, who already own outright a 200k house, and a family making 65k who are renting? The former family could easily afford a 400k home, while the second could not.

Don't you think that such anomalies are already factored into housing statistics?

My point is just that throwing out the income ratio makes it look like no one in SD can afford to live there. It just ignores alot of financial info which could easily make a more expensive house affordable. When I moved 2 years ago, my income ratio almost didn't matter because the amount of money I was putting down on the house (based on the equity of my sale) was multiples of my income.

And you sold at the very peak of the market, which means that the equity of your sale was an inflated amount that no longer exists in today's market.So, besides selling your house for a huge profit, what are some other ways that a person "could easily make a more expensive house affordable"? I am curious to know myself.

 

[stbugs]

People who were wrong about this will now reach for reasons outside of real estate, a kind of "perfect storm" if you will, that could never have been seen. Similar to the stock market, this whole thing...

Well, for me, I did not expect the amount of massive issues throughout the lending industry. I expected the fly by nights and the irrational lenders to go belly up but the big lenders (WaMu, Countrywide, Wachovia, etc) to weather it without having to go to drastic measures. I was flat out wrong and the result of that is that credit is not out in the market as much and underwriting standards have choked up to extremely conservative measures almost completely industry wide. That was one big mistake for me in what I was expecting. The other place where I underestimated was the amount of 'fear' that would hit the market. The fear is what keeps inventory high and people on the sidelines. When people fear the economy then they act very conservatively and they do not make big purchases. I expected a down turn. I just underestimated how deep and how long it would be.

Win some and lose some.

It's not just fear Chad. People are on the sidelines because they can't afford current housing prices, at least in San Diego. The median family income is ~ 65k; the median family home is still almost 400k.Those numbers don't work.

TG, please stop just throwing our median income and median prices together. Ignoring wealth, equity and savings is really a bad idea. I understand your point, but it still doesn't make it correct.If 100% of home buyers were renters with 0 savings for down payment, then that ratio would make perfect sense, but that isn't reality. In that link above with Mr. Mortgage, I believe his spreadsheet said that there were 12 million+ homes in CA. There were 500k+ sub prime loans in CA that I believe originated in 2004-2007 and 700k+ ALt-A loans in CA for the same period. That means that 1.2 million loans on 12 million houses, i.e. 10%, are driving the other 90% of prime loans and/or houses with no loans at all, i.e. if you look at all 12 million houses, there is probably a considerable amount of equity and as usual the idiots getting burned are the ones that jumped in, not because they needed a house or figured out what they could afford, but because they got greedy.

That isn't to say that it isn't having an affect, but CA is one of the worst places for those loans, hence all of the lenders going belly up seemingly all HQ'd there, so the 10% ratio is probably high nationally. I am just trying to point out that there is a considerable amount of fear driving the housing market in the same way that the considerable optimism was driving from 1998-2005.

This will all sort itself out and when my kids start buying houses, they will be amazed that I only paid 250k for my first house in the 1990s, just like I was amazed that my parents only paid 50k back in the 1970. And by that time, hopefully, I will be close to mortgage free like many of the baby boomers who have been in their houses for 25-30+ years are now.

These are good points, but I think you are underestimating how overleveraged California home buyers were/are. And plenty of people who didn't buy new homes refi their existing homes to take their equity out. Yes, there are plenty of homeowners here that have equity in their homes (true equity through principal paydowns), but they weren't the ones in the market from 2001 to 2007. I believe your description of the buyer with 100% (or close to it) financing is much closer to the rule than the exception.ETA: I think you are really overestimating the savings, wealth and equity of your typical California home buyer. The only people out here able to put 20% down on a home were people selling an existing home with market equity. That part of the market was wiped out once the first-time home buyer market was destroyed (not to mention most of their market equity is now gone too).

Actually, I don't think I am underestimating. CA was the poster child for sub prime/Alt-A and the # of mortgages in total for all of those from 2004-2007 in Mr. Mortgage's spreadsheet was 10% of the overall housing market. That is a ton of exposure, but, still that means that 90% of the homes either had a) no mortgage or b) a prime mortgage. Unless all of the b) buyers bought their homes in the last couple years, I would think that the late 90s, early 2000s house price runup created a lot of equity. Also, for every underwater existing homebuyer (not new home sales), there was an enriched homeseller.Anyway, an easy way to check would be to see what the % of new home sales were compared to existing homes. New homes are the one place with 0 equity. An existing home has to have had equity at some point before prices started to fall. I was always amazed watching SF or SD or LA homes on HGTV were 1960s homes that looked like crap went for $1 million. Well, that wasn't the price when the home was first sold, so someone made some money somewhere. This is an internet message board, with very few exceptions, most of us are less than 40 years old. Well, for everyone one of us, there are also a set of parents who "should" on average have a whole heck of a lot more equity in their homes than we do on average.

Think about it this way, people that bought stocks for the first time in 2000, have gotten their asses handed to them as of 2008. Now, however, most of the $$$ in the market was already there in 2000. The latecomers got hammered and all of the news made it seem like everyone got killed even though anyone over the age of 40 (a good bulk of the work force) in 2000, was part of one of the best stock market runs ever in the 1980s and 1990s. So even though 2000, 2001, and 2002 were horrible years (-10 to -20+ % per year), the market at the start of 2003 was still double what it was 10 years prior.

I am not trying to lessen the disaster, especially in CA, but it is just like anything else, a small percent of sales sets the entire market price. There is nothing wrong with that, but IMHO, there will be a big spike back up coming because home builders are cutting back so much, that when fear subsides the supply could dwindle quickly. Look again at the stock market. 2003 came after 3 of the 4 worst S&P 500 years since 1971 and of course 2003 was the 6th best year since 1971. While the S&P is currently below its peak in 1999/2000, it is not far below and a few months ago was right there. Don't be surprised if house prices in a few years are close to where they were at the peak after 1 really good year after the bottom (don't know when that will be) and then a handful of decent years.

 

[stbugs]

It isn't, that isn't what I said. Do you think there is a difference between a family making 65k, who already own outright a 200k house, and a family making 65k who are renting? The former family could easily afford a 400k home, while the second could not.

Don't you think that such anomalies are already factored into housing statistics?

My point is just that throwing out the income ratio makes it look like no one in SD can afford to live there. It just ignores alot of financial info which could easily make a more expensive house affordable. When I moved 2 years ago, my income ratio almost didn't matter because the amount of money I was putting down on the house (based on the equity of my sale) was multiples of my income.

And you sold at the very peak of the market, which means that the equity of your sale was an inflated amount that no longer exists in today's market.So, besides selling your house for a huge profit, what are some other ways that a person "could easily make a more expensive house affordable"? I am curious to know myself.

What? How could that anomaly be factored into the statistic that TGunz put out there? His statistic was 65k median income and 400k median house price. Where in that is the median equity that buyers have or the median savings? That was my whole point. Chances are a 45 year old buyer making 65k is much better off than a 20 something buyer making 65k because the 45 year old probably has a decent amount of equity to use to purchase the next home versus the 20 something buying their first house.

Again, your second point is way off as well. Yes, my sell price is well over what my old house is now worth. However, guess what, the current worth is still 2x what I originally paid for it 10+ years ago, just like the stock market examples above. Even though the person who bought my house got screwed, the amount of total equity for that house is still very positive from the original sales price.

Sure, maybe I only got the benefit, but it doesn't mean that 100% of all equity went away. Again, I think people look at a new house bought in 2006 which is underwater and somehow assume that all houses are underwater, which is far from true.

 

[[scooter]]

How could that anomaly be factored into the statistic that TGunz put out there? His statistic was 65k median income and 400k median house price. Where in that is the median equity that buyers have or the median savings?

Time and time again, affordability studies have shown a direct correlation between median income and housing prices. I've yet to see such a study that compares "median equity" or "median savings". Furthermore, how can you even begin to factor in a concept such as "median equity" when it fluctuates so much? All home buyers have jobs. Not all home buyers have equity or savings.But let's get back to my previous question. You said there was "alot of financial info which could easily make a more expensive house affordable".

And I'd like a list, please.

 

[stbugs]

How could that anomaly be factored into the statistic that TGunz put out there? His statistic was 65k median income and 400k median house price. Where in that is the median equity that buyers have or the median savings?

Time and time again, affordability studies have shown a direct correlation between median income and housing prices. I've yet to see such a study that compares "median equity" or "median savings". Furthermore, how can you even begin to factor in a concept such as "median equity" when it fluctuates so much? All home buyers have jobs. Not all home buyers have equity or savings.But let's get back to my previous question. You said there was "alot of financial info which could easily make a more expensive house affordable".

And I'd like a list, please.

Have you ever bought a house?

First of all, I never said there wasn't a correlation. I said that throwing up 65k median income and 400k median house prices is misleading. It makes it look like every home buyer would have to pay 6x their income for a house. Didn't we just hear all about lenders tightening up lending standards, i.e. if you don't have 20% to put down, then go away. Well, then for a 20% deposit, isn't the real ratio 65k to 320k? Doesn't that look a lot less daunting.

Anyway, you may think that I am trying to argue for CA real estate prices, but I think they are ridiculous and always have thought that while watching shows where a house half as big as mine with 1960s kitchens, etc. sell for 2x what mine cost on less land, etc.

My only point was that without considering how much savings, equity, deposit, etc. someone has, the income ratio to house price ratio is misleading and usually used to show how out of whack prices are. In SD, they were out of whack and out of touch and hence the correction, but if in SD, people have to put down 20%, then the ratio of 65k to 400k is misleading.

For example, this situation may not be prevalent where I live, but in CA it probably is more prevalent. On an HGTV show, they showed a father buying a house for his daughter. The father live in Japan and his daughter was I think going to school in CA or just out of school. His assets were what bought the house, not her income.

Again, if you have ever bought a house, this list should look familiar, because it is exactly what I had to fill out to get my loan, so here you go:

1) Current equity in home, i.e. appraisal value/sales price - current loan amounts.

2) Liquid savings in:

2a) Money markets

2b) CDs

2c) Bonds

2d) Stocks

2e) Checking and savings accounts

2f) Life insurance net cash value

2g) Vested amount in retirement funds

2h) Real Estate equity outside of primary home

2i) Automobiles owned

2j) Other collectibles, paintings, jewelry, antiques, etc.

2k) Hedge funds/Partnerships/Businesses/Who knows

3) Other income:

3a) Pensions*

3b) Social security*

3c) Annuities

3d) Alimony**

3e) Rental income

3f) Bonuses - Not sure if this is counted in income, but in NYC, this makes the housing market go and on the Uniform Residential Loan Application, it is a separate box

3g) Dividends

3h) Interest

3g) Drug dealing money***

4) Anything else under the sun that I forgot

* Yes, old people do move and retire and buy houses.

** Yes, divorced women and emasculated divorced men do buy houses.

*** Yes, in Detroit, drug dealers do buy and rent out crack houses.

 

[drpill]

http://www.oftwominds.com/blogapr08/RE-bottom4-08.html

Want to Know When Housing Has Bottomed? Here's How

April 23, 2008

The shills and cheerleaders are already calling the "bottom" in housing prices. It's worth recalling that these are the same Nostradamuses who declared the last "bottom" in 1991, 1992, 1993, 1994, 1995 and 1996--and voila, they were finally right seven years into the slide (1997).

Want to know when the "bottom" is finally in? The "bottom" will be close when buying real estate make sense as a sound business proposition. This kind of foreclosed/distressed property is not even close to being a decent business proposition:

What's a sound business proposition? making a profit from day one, without the aid of any tax shenanigans. At the real bottom in real estate cycles, you can buy a house or apartment and rent it out at market rates--and make a profit on day one in cash-accounting terms.

If you can't rent the property out for a profit from day one, it isn't the bottom.

Untold numbers of inexperienced speculators bought homes with the untested notion that they could "rent it out" ("buy to let" in the U.K.) if flipping it for vast profits didn't work out. Let's go through the actual expenses of an absentee landlord/owner:

1. down payment. The down payment isn't "free": you could be earning 3% or so in a money market/T-bill. As pathetic as that is, it's not zero. If the down payment isn't earning more than 3%, then why bother buying real estate?

2. mortgage/borrowed money. This is self-evident. But wait--there's more!

3. property management. Even if you do it yourself, it's not "free"; nobody's time is free. The standard fee is abour 5-6% to handle the rental and collect the rent. This does not cover gardening, upkeep, repairs, etc.--those are extra. Plus somebody has to respond to tenant complaints. That's not free, either.

4. property taxes. Like weeds, these just grow constantly. Don't forget the special assessments.

5. advertising/marketing. Sure, craigslist is free--but somebody has to meet prospective tenants, process their rental applications, check their credit, etc. Maybe that's included in your property management fee, maybe not.

6. auto/truck expenses. hauling stuff to the dump and driving to Lowes/Home Cheepo isn't free.

7. cleaning and maintenance. When the tenant moves out, the place isn't perfect, no matter what you hope/what the lease says. (And how good is that lease, anyway? Better add a couple hundred bucks for attorney's fees if you're smart.)

Ah, maintenance. That covers quite a few costly items: appliances that die, carpets that wear out, hardwood floors stained by cat pee/soggy house plants, furnace filters, paint that gets grimy, etc. Many pros figure 10% of the rent goes (eventually) to repairs/maintenance. If you stipulate the tenant takes care of the yard, be prepared to own a slum.

8. Insurance. It's nice if you could get homeowner's coverage, but you can't--your rental is a commercial property. Now you need liability coverage, too, not just fire insurance. Nothing like a tenant "tripping on the broken concrete" to remind you of that.

9. repairs. A building is a living thing which breaks down over time--expecially if it's a cheaply built, poorly constructed McMansion/condo. Windows break, paint peels, roofing leaks, flashing rusts, stairs rot, crummy veneer flooring delaminates, the list is endless.

10. utilities. Many landlords pay for water, but maybe you won't.

11. fees and licenses. Your city or county probably wants some business license fees from your landlording business. One way or another, there's sure to be some fees or licensing costs somewhere. Maybe the city inspects the property for safety--and bills you. Some agency or municipality is sure to assess you something beyond property tax.

12. Vacancies. Yes, some premium properties are rarely empty, but don't fool yourself--the pros know vacancies are a fact of rental real estate life. Most figure 5% (for premium properties) to 10% (for less than premium).

OK, so let's say a rental property rents for $1,500/month in the real world. In my neck of the woods, this would be a small 2-bedroom, 1-bath bungalow. Maybe in your area, it would be a 4-bedroom, 2-bath home. Regardless, the key is to add up the real-world expenses and see if owning the property pencils out as a business proposition.

Due to variations in property tax rates, it's difficult to set a generic cost to owning a house. And of course, the property tax drops along with the value of the property.

To keep things simple. let's say the rental costs $300,000 and the owner bought it with no down payment. According to zillow.com's mortgage estimation tool, a $300K mortgage at 6% (30-year fixed-rate) costs $2,124/month or $25,500 a year.

A rough guesstimate of all the non-mortgage expenses listed above for a $300K property comes to between $8,000 and $9,000, so let's take the lower number. (Insurance and other costs vary widely, too.) $8K + $25K = $33K in expenses against $18K in annual income. A $15,000 per year loss is not a good business proposition.

So let's lower the price to $200,000. The mortgage drops to $18,000 a year, and the lower valuation shaves $1,000 off the property tax. So $7K + $18K = $25K versus an annual income of $18K. A $7,000 annual loss is a lousy business proposition.

So let's drop the price down to $150,000. The mortgage drops to $1,224/month or $14,600 annually. Let's shave another $1,000 off the property tax (too bad for the city/ county depending onrising property tax revenues) and assume all non-mortgage expenses can be reduced to $6,000 per year. $14.5K + $6K = $20.5K versus $18,000 rental income: we're down to a $2,500 annual loss.

So let's ratchet the pruchase price down to $130,000. Now the mortgage is only $13,000 a year and the non-mortgage expenses, well let's say they're down to $5,500 a year. $13K + $5.5K = $18.5K against $18K in rental income. Hey, we're finally getting close to breakeven here. An actual, honest profit is just around the corner.

So let's assume a purchase price of $126,000 for the house which rents for $1,500 per month ($18,000 a year). Now at long last we can anticipate a modest profit--unless of course the property sits vacant more than a few weeks out of the year.

Real estate investment pros have a rule of thumb for establishing fair value of rental property. Multiply the annual gross rental by between 6 and 10; that gives you a "business" estimate of the value of the rental. In not-so-great neighborhoods, a multiple of 6 is standard; a house that rents for $18,000 a year would thus be worth $108,000. A moderate neighborhood would fetch a multiple of 7--magically, our $126,000 number. Premium neighborhoods (where it is presumed you can raise the rents) may be worth 8 to 10 times gross annual rents.

So even in a wonderful neighborhood with terrific schools and other assets, a house renting for $18,000 a year is worth no more than $175,000--as a business proposition. Of course you can pay more, but you're paying for "blue sky," not an asset that can be sold on the open market as a business proposition.

There are many other variables, of course; if interest rates climb, then the cost of the property has to decline further to make investment sense. Nonetheless, we can say with great historical accuracy that housing of any sort which can be purchased for a multiple of 6 or 7 is a sound investment. History suggests that only when properties are selling for these low multiples can we discern the "bottom."

And when will that occur? If we look at the chart of mortgage re-sets, we see the non-subprime re-sets really start rising in 2009 and keep increasing all the way through 2011 before finally falling off in 2012. Since we can also anticipate the recession will be neither shallow nor short, there are ample reasons to expect the inventory of unsold homes to rise in inverse proportion to the number of qualified, willing buyers. What does an oversupply of merchandise (houses) and a dearth of demand/buyers lead to? Falling prices.

It's easy to multiply a number by 7. That big house down the street that rents for $3,000 a month/$36,000 a year? At the real "bottom," that house will sell for about $250,000 (or less). That condo which rents for $1,200/month/$14,000 a year? $100,000, tops. And so on.

Can real estate decline in value? Yes. At what point does it make sense to buy real estate as an investment which bests other business opportunities? When it makes a profit on day one, after all expenses, not just mortgage/property tax/insurance. And what's a time-tested method of figuring that price? Seven times gross annual rental income.

Calling the bottom won't be that difficult; it requires only patience and simple arithmetic.

One caveat: if a property can't be rented at any price, its value is essentially zero.

 

[Lupe]

annual appraisals expected to be mailed in the nest couple of weeks for Austin area....prices still up over last year.

Got my annual appraisal (Harris County) last month here in Katy, TX (Suburb of Houston). My house appraisal is up 10% from last year. I'm gonna fight it though.

 

[John Mamula]

http://www.oftwominds.com/blogapr08/RE-bottom4-08.html

Want to Know When Housing Has Bottomed? Here's How

April 23, 2008

The shills and cheerleaders are already calling the "bottom" in housing prices. It's worth recalling that these are the same Nostradamuses who declared the last "bottom" in 1991, 1992, 1993, 1994, 1995 and 1996--and voila, they were finally right seven years into the slide (1997).

Want to know when the "bottom" is finally in? The "bottom" will be close when buying real estate make sense as a sound business proposition. This kind of foreclosed/distressed property is not even close to being a decent business proposition:

What's a sound business proposition? making a profit from day one, without the aid of any tax shenanigans. At the real bottom in real estate cycles, you can buy a house or apartment and rent it out at market rates--and make a profit on day one in cash-accounting terms.

If you can't rent the property out for a profit from day one, it isn't the bottom.

Untold numbers of inexperienced speculators bought homes with the untested notion that they could "rent it out" ("buy to let" in the U.K.) if flipping it for vast profits didn't work out. Let's go through the actual expenses of an absentee landlord/owner:

1. down payment. The down payment isn't "free": you could be earning 3% or so in a money market/T-bill. As pathetic as that is, it's not zero. If the down payment isn't earning more than 3%, then why bother buying real estate?

2. mortgage/borrowed money. This is self-evident. But wait--there's more!

3. property management. Even if you do it yourself, it's not "free"; nobody's time is free. The standard fee is abour 5-6% to handle the rental and collect the rent. This does not cover gardening, upkeep, repairs, etc.--those are extra. Plus somebody has to respond to tenant complaints. That's not free, either.

4. property taxes. Like weeds, these just grow constantly. Don't forget the special assessments.

5. advertising/marketing. Sure, craigslist is free--but somebody has to meet prospective tenants, process their rental applications, check their credit, etc. Maybe that's included in your property management fee, maybe not.

6. auto/truck expenses. hauling stuff to the dump and driving to Lowes/Home Cheepo isn't free.

7. cleaning and maintenance. When the tenant moves out, the place isn't perfect, no matter what you hope/what the lease says. (And how good is that lease, anyway? Better add a couple hundred bucks for attorney's fees if you're smart.)

Ah, maintenance. That covers quite a few costly items: appliances that die, carpets that wear out, hardwood floors stained by cat pee/soggy house plants, furnace filters, paint that gets grimy, etc. Many pros figure 10% of the rent goes (eventually) to repairs/maintenance. If you stipulate the tenant takes care of the yard, be prepared to own a slum.

8. Insurance. It's nice if you could get homeowner's coverage, but you can't--your rental is a commercial property. Now you need liability coverage, too, not just fire insurance. Nothing like a tenant "tripping on the broken concrete" to remind you of that.

9. repairs. A building is a living thing which breaks down over time--expecially if it's a cheaply built, poorly constructed McMansion/condo. Windows break, paint peels, roofing leaks, flashing rusts, stairs rot, crummy veneer flooring delaminates, the list is endless.

10. utilities. Many landlords pay for water, but maybe you won't.

11. fees and licenses. Your city or county probably wants some business license fees from your landlording business. One way or another, there's sure to be some fees or licensing costs somewhere. Maybe the city inspects the property for safety--and bills you. Some agency or municipality is sure to assess you something beyond property tax.

12. Vacancies. Yes, some premium properties are rarely empty, but don't fool yourself--the pros know vacancies are a fact of rental real estate life. Most figure 5% (for premium properties) to 10% (for less than premium).

OK, so let's say a rental property rents for $1,500/month in the real world. In my neck of the woods, this would be a small 2-bedroom, 1-bath bungalow. Maybe in your area, it would be a 4-bedroom, 2-bath home. Regardless, the key is to add up the real-world expenses and see if owning the property pencils out as a business proposition.

Due to variations in property tax rates, it's difficult to set a generic cost to owning a house. And of course, the property tax drops along with the value of the property.

To keep things simple. let's say the rental costs $300,000 and the owner bought it with no down payment. According to zillow.com's mortgage estimation tool, a $300K mortgage at 6% (30-year fixed-rate) costs $2,124/month or $25,500 a year.

A rough guesstimate of all the non-mortgage expenses listed above for a $300K property comes to between $8,000 and $9,000, so let's take the lower number. (Insurance and other costs vary widely, too.) $8K + $25K = $33K in expenses against $18K in annual income. A $15,000 per year loss is not a good business proposition.

So let's lower the price to $200,000. The mortgage drops to $18,000 a year, and the lower valuation shaves $1,000 off the property tax. So $7K + $18K = $25K versus an annual income of $18K. A $7,000 annual loss is a lousy business proposition.

So let's drop the price down to $150,000. The mortgage drops to $1,224/month or $14,600 annually. Let's shave another $1,000 off the property tax (too bad for the city/ county depending onrising property tax revenues) and assume all non-mortgage expenses can be reduced to $6,000 per year. $14.5K + $6K = $20.5K versus $18,000 rental income: we're down to a $2,500 annual loss.

So let's ratchet the pruchase price down to $130,000. Now the mortgage is only $13,000 a year and the non-mortgage expenses, well let's say they're down to $5,500 a year. $13K + $5.5K = $18.5K against $18K in rental income. Hey, we're finally getting close to breakeven here. An actual, honest profit is just around the corner.

So let's assume a purchase price of $126,000 for the house which rents for $1,500 per month ($18,000 a year). Now at long last we can anticipate a modest profit--unless of course the property sits vacant more than a few weeks out of the year.

Real estate investment pros have a rule of thumb for establishing fair value of rental property. Multiply the annual gross rental by between 6 and 10; that gives you a "business" estimate of the value of the rental. In not-so-great neighborhoods, a multiple of 6 is standard; a house that rents for $18,000 a year would thus be worth $108,000. A moderate neighborhood would fetch a multiple of 7--magically, our $126,000 number. Premium neighborhoods (where it is presumed you can raise the rents) may be worth 8 to 10 times gross annual rents.

So even in a wonderful neighborhood with terrific schools and other assets, a house renting for $18,000 a year is worth no more than $175,000--as a business proposition. Of course you can pay more, but you're paying for "blue sky," not an asset that can be sold on the open market as a business proposition.

There are many other variables, of course; if interest rates climb, then the cost of the property has to decline further to make investment sense. Nonetheless, we can say with great historical accuracy that housing of any sort which can be purchased for a multiple of 6 or 7 is a sound investment. History suggests that only when properties are selling for these low multiples can we discern the "bottom."

And when will that occur? If we look at the chart of mortgage re-sets, we see the non-subprime re-sets really start rising in 2009 and keep increasing all the way through 2011 before finally falling off in 2012. Since we can also anticipate the recession will be neither shallow nor short, there are ample reasons to expect the inventory of unsold homes to rise in inverse proportion to the number of qualified, willing buyers. What does an oversupply of merchandise (houses) and a dearth of demand/buyers lead to? Falling prices.

It's easy to multiply a number by 7. That big house down the street that rents for $3,000 a month/$36,000 a year? At the real "bottom," that house will sell for about $250,000 (or less). That condo which rents for $1,200/month/$14,000 a year? $100,000, tops. And so on.

Can real estate decline in value? Yes. At what point does it make sense to buy real estate as an investment which bests other business opportunities? When it makes a profit on day one, after all expenses, not just mortgage/property tax/insurance. And what's a time-tested method of figuring that price? Seven times gross annual rental income.

Calling the bottom won't be that difficult; it requires only patience and simple arithmetic.

One caveat: if a property can't be rented at any price, its value is essentially zero.

lolthat is the worst article in real estate i have ever read.

seriously.

 

[drpill]

lolthat is the worst article in real estate i have ever read.seriously.

I'm no expert, but I thought it might be useful. I've often heard price to rent ratios listed as one of the fundamentals of housing values. What mistakes are being made here?

 

[tommyGunZ]

lolthat is the worst article in real estate i have ever read.seriously.

worse than those articles you read the past two years calling false bottoms?

 

[Sonny Lubick Blowup Doll]

God I love this thread.

 

[John Mamula]

lolthat is the worst article in real estate i have ever read.seriously.

I'm no expert, but I thought it might be useful. I've often heard price to rent ratios listed as one of the fundamentals of housing values. What mistakes are being made here?

well it seems like it was written by a 4th grader, first of all.secondly, the economics of buying a place as a rental and buying a place as you personal residence are different. if you are buying a rental, yes the article is correct that you always want it to cash flow from day 1. however, in phoenix foreclosed homes and condos owned by banks are giving you the prices you need to rent.it lists expenses like car expenses which is grasping at straws and fails to recognize that you can run all of your expenses to offset income and even take on accounting expenses like depreciation of the unit (and even "home office" expenses where you can expense a % of your home's (not your rental's) utilities, property taxes, interest, etc. a rental can easily become a tax shelter even if you are cash flowing.this whole 7 multiplier is nothing i have ever seen.in phoenix we see rents at about $1 a foot. so you can rent a 700 sf unit for $700 a month. this cash flows on a 30 year fixed even at $80k-$90k for the unit. so that multiplier is 10. i bought a house last year and rented out my condo (knowing it wouldn't cash flow but i was fine with that). i can rent the condo out for $1,100 a month. however i could sell it today immediately for $275k (comps in my complex are going for that in today's market). thats a multiplier of like 21. the reason for this discrepency is that the rental market does not trend on house values. it trends on other rental properties and is an extremely price sensitive market. i am sure if you go from city to city you'll find all sorts of nuances.when you buy your personal residence it is not about a cash flowing property. you are spending money for either a rental or a home so it is money out the door. there are also real tax advantages for owning a home that once you start reaching a certain income threshold.there are a lot of indicators to signal when we're sniffing around the bottom. what is unknown is how protracted the time will be where we will stay at the bottom and like a recession, you typically don't know when you've hit the bottom until you're already coming out of it.there are still a lot of homebuilders and banks that will go out of business before this thing is done.

 

[John Mamula]

lolthat is the worst article in real estate i have ever read.seriously.

worse than those articles you read the past two years calling false bottoms?

do you think that quoted article is good?i could say the same thing as you about real estate bears calling a peak from 2001-2005.i bought my condo in 2003 and even in today's market could sell it for an 80% gain from where I bought it. my wife bought her condo in 2005 and sold it in 2006 for a 34% gain of which we used to buy our house in 2007.if I had listened to the Bears we would still be renting.instead i am living in a house i could not have otherwise afforded without moving up the property ladder and still have a condo that cash flows enough that between it and the tax shelter it creates, is effectively a push every year.i'll likely look into selling it in 2010.but you keep on patting yourself on the back for calling a peak for all the wrong reasons.

 

[tommyGunZ]

i can rent the condo out for $1,100 a month. however i could sell it today immediately for $275k (comps in my complex are going for that in today's market).

with home prices falling, why in the world would you not sell? This strategery is completely lost on me.You're holding onto RE that is cash flow negative in a depreciating market?

 

[tommyGunZ]

lolthat is the worst article in real estate i have ever read.seriously.

worse than those articles you read the past two years calling false bottoms?

do you think that quoted article is good?

not really. but not the worst I've ever seen.

i could say the same thing as you about real estate bears calling a peak from 2001-2005.i bought my condo in 2003 and even in today's market could sell it for an 80% gain from where I bought it.

Great move by you. Would you have made more if you sold last year?

my wife bought her condo in 2005 and sold it in 2006 for a 34% gain of which we used to buy our house in 2007.

Great move by her. Good thing she didn't hold onto it and have to give back those gains.

if I had listened to the Bears we would still be renting.

Wouldn't the optimal position be to have sold in '06, be renting now, and ready to pounce in a year or two when the market stabilizes?

instead i am living in a house i could not have otherwise afforded without moving up the property ladder and still have a condo that cash flows enough that between it and the tax shelter it creates, is effectively a push every year.

Still wondering about why you hold onto the condo when the rent is not even close to cashing.

i'll likely look into selling it in 2010.

so you're gonna hold it until the absolute bottom and then sell?

but you keep on patting yourself on the back for calling a peak for all the wrong reasons.

Looks like SLBD nailed this one.

 

[John Mamula]

i can rent the condo out for $1,100 a month. however i could sell it today immediately for $275k (comps in my complex are going for that in today's market).

with home prices falling, why in the world would you not sell? This strategery is completely lost on me.You're holding onto RE that is cash flow negative in a depreciating market?

the prices have stopped falling in my complex. for my unit there have been multiple sales comps that have sold at $275k over the last 6 months. nothing is listed even below $285k anymore (which is why i said i could sell it today quick for $275k). the issue in phoenix is that there currently is NO market. we're on pace for 15k permits (45k is normal). resales typically are at a volume of 3x new permits.this is a good thing to get inventory back on track, which is more of an issue with resales than new builds. however, i am seeing a trend of resale inventory going forward decline (we have 6k units pending sale in phoenix currently, compared to 3k in january). we've been averaging 1k of sales a week for the last month (up from 500 a week in january).in phoenix, and especially scottsdale we're within a 5% or so range of the bottom. now we're not going to be screaming up from the bottom any time soon. 2008 is a wash and likely so will most of 2009. most of the sales i am seeing are short sales and foreclosures, homes that are going for screaming deals. while this does put some downward pressure on pricing as long as people don't have to move, their prices will be sticky. there are no foreclosures or short sales in my complex currently so we haven't seen that.but most importantly, why would i sell now? you don't sell low if you don't have to. and right now i don't have to. what incremental dollars i lose over the next couple years will pale in comparison to what i could sell my unit at in a normalized market.as an fyi, there are lake units in my complex that traditionally sell for $75k more than the park units (i'm a park unit). lake units today are selling at $450k. there is still a market for them since they offer a unique value proposition...lake views in AZ (even if it is a man made lake). there is such a glut of "normal" condo units that it has drastically reduced the pricing of my unit to where the spread is now $175k between lake units and park units. i don't think that extra $100k gap will be filled dollar for dollar by 2010, but even if it is half, i will have made myself a lot of money by treading water renting my place out.

 

[Moe Green]

Getting tired of renting yet, TGunz?

 

[tommyGunZ]

i can rent the condo out for $1,100 a month. however i could sell it today immediately for $275k (comps in my complex are going for that in today's market).

with home prices falling, why in the world would you not sell? This strategery is completely lost on me.You're holding onto RE that is cash flow negative in a depreciating market?

the prices have stopped falling in my complex. for my unit there have been multiple sales comps that have sold at $275k over the last 6 months. nothing is listed even below $285k anymore (which is why i said i could sell it today quick for $275k). the issue in phoenix is that there currently is NO market. we're on pace for 15k permits (45k is normal). resales typically are at a volume of 3x new permits.this is a good thing to get inventory back on track, which is more of an issue with resales than new builds. however, i am seeing a trend of resale inventory going forward decline (we have 6k units pending sale in phoenix currently, compared to 3k in january). we've been averaging 1k of sales a week for the last month (up from 500 a week in january).in phoenix, and especially scottsdale we're within a 5% or so range of the bottom. now we're not going to be screaming up from the bottom any time soon. 2008 is a wash and likely so will most of 2009. most of the sales i am seeing are short sales and foreclosures, homes that are going for screaming deals. while this does put some downward pressure on pricing as long as people don't have to move, their prices will be sticky. there are no foreclosures or short sales in my complex currently so we haven't seen that.but most importantly, why would i sell now? you don't sell low if you don't have to. and right now i don't have to. what incremental dollars i lose over the next couple years will pale in comparison to what i could sell my unit at in a normalized market.as an fyi, there are lake units in my complex that traditionally sell for $75k more than the park units (i'm a park unit). lake units today are selling at $450k. there is still a market for them since they offer a unique value proposition...lake views in AZ (even if it is a man made lake). there is such a glut of "normal" condo units that it has drastically reduced the pricing of my unit to where the spread is now $175k between lake units and park units. i don't think that extra $100k gap will be filled dollar for dollar by 2010, but even if it is half, i will have made myself a lot of money by treading water renting my place out.

I guess the part that blows me away is the fact that people will pay 275k for a home that they can rent for $1100. To me, that screams "Prices are out of whack, and must fall much further". It certainly doesn't suggest a bottom, IMO.But again, I defer to you because I don't follow the PHX market very closely. I know it's mentioned with Vegas and SoCal as the most overpriced markets and the bubble leaders, but that's about all I know.GL.

 

[John Mamula]

Wouldn't the optimal position be to have sold in '06, be renting now, and ready to pounce in a year or two when the market stabilizes?

well of course. but you can say that for every market.in 2005 i had conversations with my buddy who does a lot of rentals and we were saying how much you could sell my place for ($380k at the peak). i was tempted but here's the rub...where do you live? this wasn't a rental then. it was my primary residence. i am not about to go rent a place lowering my standard of living and giving up tax breaks at the potential of my place giving up value.if i knew then what i know now would i have done it? sure. but if you try to time every market and dump your primary residence at a projected peak, you may very easily be renting for 4-5 years something that is not an option for me.i did consider selling the place and buying a smaller place so if i was buying that at the top at least i would have pocketed some equity but again i would be cramming down on my lifestyle.trust me tommy, once you buy your first place, you will understand how you will never go back to renting again. and honestly if you buy right, you don't need to. as long as you can afford your monthly payment you just ride out the downturns and enjoy the long term appreciation a house has always given its owner.

 

[John Mamula]

i can rent the condo out for $1,100 a month. however i could sell it today immediately for $275k (comps in my complex are going for that in today's market).

with home prices falling, why in the world would you not sell? This strategery is completely lost on me.You're holding onto RE that is cash flow negative in a depreciating market?

the prices have stopped falling in my complex. for my unit there have been multiple sales comps that have sold at $275k over the last 6 months. nothing is listed even below $285k anymore (which is why i said i could sell it today quick for $275k). the issue in phoenix is that there currently is NO market. we're on pace for 15k permits (45k is normal). resales typically are at a volume of 3x new permits.this is a good thing to get inventory back on track, which is more of an issue with resales than new builds. however, i am seeing a trend of resale inventory going forward decline (we have 6k units pending sale in phoenix currently, compared to 3k in january). we've been averaging 1k of sales a week for the last month (up from 500 a week in january).in phoenix, and especially scottsdale we're within a 5% or so range of the bottom. now we're not going to be screaming up from the bottom any time soon. 2008 is a wash and likely so will most of 2009. most of the sales i am seeing are short sales and foreclosures, homes that are going for screaming deals. while this does put some downward pressure on pricing as long as people don't have to move, their prices will be sticky. there are no foreclosures or short sales in my complex currently so we haven't seen that.but most importantly, why would i sell now? you don't sell low if you don't have to. and right now i don't have to. what incremental dollars i lose over the next couple years will pale in comparison to what i could sell my unit at in a normalized market.as an fyi, there are lake units in my complex that traditionally sell for $75k more than the park units (i'm a park unit). lake units today are selling at $450k. there is still a market for them since they offer a unique value proposition...lake views in AZ (even if it is a man made lake). there is such a glut of "normal" condo units that it has drastically reduced the pricing of my unit to where the spread is now $175k between lake units and park units. i don't think that extra $100k gap will be filled dollar for dollar by 2010, but even if it is half, i will have made myself a lot of money by treading water renting my place out.

I guess the part that blows me away is the fact that people will pay 275k for a home that they can rent for $1100. To me, that screams "Prices are out of whack, and must fall much further". It certainly doesn't suggest a bottom, IMO.But again, I defer to you because I don't follow the PHX market very closely. I know it's mentioned with Vegas and SoCal as the most overpriced markets and the bubble leaders, but that's about all I know.GL.

i didn't buy it for $275k.rental prices in phoenix are very deflated right now. during the boom you had a lot of condos that have now been converted to rentals, you have speculators and investors renting, and people like myself who are renting.the supply in the rental market has nothing to do with the basis of my home.

 

[moneyman]

i can rent the condo out for $1,100 a month. however i could sell it today immediately for $275k (comps in my complex are going for that in today's market).

with home prices falling, why in the world would you not sell? This strategery is completely lost on me.You're holding onto RE that is cash flow negative in a depreciating market?

the prices have stopped falling in my complex. for my unit there have been multiple sales comps that have sold at $275k over the last 6 months. nothing is listed even below $285k anymore (which is why i said i could sell it today quick for $275k). the issue in phoenix is that there currently is NO market. we're on pace for 15k permits (45k is normal). resales typically are at a volume of 3x new permits.this is a good thing to get inventory back on track, which is more of an issue with resales than new builds. however, i am seeing a trend of resale inventory going forward decline (we have 6k units pending sale in phoenix currently, compared to 3k in january). we've been averaging 1k of sales a week for the last month (up from 500 a week in january).in phoenix, and especially scottsdale we're within a 5% or so range of the bottom. now we're not going to be screaming up from the bottom any time soon. 2008 is a wash and likely so will most of 2009. most of the sales i am seeing are short sales and foreclosures, homes that are going for screaming deals. while this does put some downward pressure on pricing as long as people don't have to move, their prices will be sticky. there are no foreclosures or short sales in my complex currently so we haven't seen that.but most importantly, why would i sell now? you don't sell low if you don't have to. and right now i don't have to. what incremental dollars i lose over the next couple years will pale in comparison to what i could sell my unit at in a normalized market.as an fyi, there are lake units in my complex that traditionally sell for $75k more than the park units (i'm a park unit). lake units today are selling at $450k. there is still a market for them since they offer a unique value proposition...lake views in AZ (even if it is a man made lake). there is such a glut of "normal" condo units that it has drastically reduced the pricing of my unit to where the spread is now $175k between lake units and park units. i don't think that extra $100k gap will be filled dollar for dollar by 2010, but even if it is half, i will have made myself a lot of money by treading water renting my place out.

I guess the part that blows me away is the fact that people will pay 275k for a home that they can rent for $1100. To me, that screams "Prices are out of whack, and must fall much further". It certainly doesn't suggest a bottom, IMO.But again, I defer to you because I don't follow the PHX market very closely. I know it's mentioned with Vegas and SoCal as the most overpriced markets and the bubble leaders, but that's about all I know.GL.

i didn't buy it for $275k.rental prices in phoenix are very deflated right now. during the boom you had a lot of condos that have now been converted to rentals, you have speculators and investors renting, and people like myself who are renting.the supply in the rental market has nothing to do with the basis of my home.

Hey Bagger-Do you see that supply of rental units dwindling in Phoenix and rental rates bumping up any time soon? I have a couple of single family rentals in the Phoenix area. I'm about $100 negative per month which isn't a big deal, but more than values right now ( which I'm not overly concerned about since this is a long term investment) I'm just waiting for the rents to go up. I think those condo conversions kept rents down during the boom and now the distressed owners renting out are keeping them down now. Is that the way you read it?thx

 

[Chadstroma]

lolthat is the worst article in real estate i have ever read.seriously.

worse than those articles you read the past two years calling false bottoms?

Anyone who thinks they can call the bottom and be accurate without obscene amounts of luck is insane.

 

[tommyGunZ]

Wouldn't the optimal position be to have sold in '06, be renting now, and ready to pounce in a year or two when the market stabilizes?

well of course. but you can say that for every market.in 2005 i had conversations with my buddy who does a lot of rentals and we were saying how much you could sell my place for ($380k at the peak). i was tempted but here's the rub...where do you live? this wasn't a rental then. it was my primary residence. i am not about to go rent a place lowering my standard of living and giving up tax breaks at the potential of my place giving up value.

I can't argue with you here - you're talking about emotions and standards of living and the like. I'm talking pure dollars and cents. I don't blame you for not selling. Who knew at the time that prices were about to take a dump? I certainly didn't - I only knew that homes were overvalued, hence the start of this thread and my bubble sitting. I could very well have been wrong.

i did consider selling the place and buying a smaller place so if i was buying that at the top at least i would have pocketed some equity but again i would be cramming down on my lifestyle.trust me tommy, once you buy your first place, you will understand how you will never go back to renting again. and honestly if you buy right, you don't need to. as long as you can afford your monthly payment you just ride out the downturns and enjoy the long term appreciation a house has always given its owner.

This is the part that I don't get. I doubt I'll ever be in a position to take $100k equity hits and justify it by suggesting that it wasn't worth it to cram my lifestyle. I understand that those with kids may not uproot even if they see a big downturn coming - but until then I have no shame in "renting" the same quality home for 1/2 or 1/3 the price while homes are falling thousands of dollars in value every month.Maybe I'll change my mind, and "pride of ownership" will trump wise fiscal maneuvers, but I sure hope not. 100k is a lot of ####### dough.

 

[tommyGunZ]

i can rent the condo out for $1,100 a month. however i could sell it today immediately for $275k (comps in my complex are going for that in today's market).

with home prices falling, why in the world would you not sell? This strategery is completely lost on me.You're holding onto RE that is cash flow negative in a depreciating market?

the prices have stopped falling in my complex. for my unit there have been multiple sales comps that have sold at $275k over the last 6 months. nothing is listed even below $285k anymore (which is why i said i could sell it today quick for $275k). the issue in phoenix is that there currently is NO market. we're on pace for 15k permits (45k is normal). resales typically are at a volume of 3x new permits.this is a good thing to get inventory back on track, which is more of an issue with resales than new builds. however, i am seeing a trend of resale inventory going forward decline (we have 6k units pending sale in phoenix currently, compared to 3k in january). we've been averaging 1k of sales a week for the last month (up from 500 a week in january).in phoenix, and especially scottsdale we're within a 5% or so range of the bottom. now we're not going to be screaming up from the bottom any time soon. 2008 is a wash and likely so will most of 2009. most of the sales i am seeing are short sales and foreclosures, homes that are going for screaming deals. while this does put some downward pressure on pricing as long as people don't have to move, their prices will be sticky. there are no foreclosures or short sales in my complex currently so we haven't seen that.but most importantly, why would i sell now? you don't sell low if you don't have to. and right now i don't have to. what incremental dollars i lose over the next couple years will pale in comparison to what i could sell my unit at in a normalized market.as an fyi, there are lake units in my complex that traditionally sell for $75k more than the park units (i'm a park unit). lake units today are selling at $450k. there is still a market for them since they offer a unique value proposition...lake views in AZ (even if it is a man made lake). there is such a glut of "normal" condo units that it has drastically reduced the pricing of my unit to where the spread is now $175k between lake units and park units. i don't think that extra $100k gap will be filled dollar for dollar by 2010, but even if it is half, i will have made myself a lot of money by treading water renting my place out.

I guess the part that blows me away is the fact that people will pay 275k for a home that they can rent for $1100. To me, that screams "Prices are out of whack, and must fall much further". It certainly doesn't suggest a bottom, IMO.But again, I defer to you because I don't follow the PHX market very closely. I know it's mentioned with Vegas and SoCal as the most overpriced markets and the bubble leaders, but that's about all I know.GL.

i didn't buy it for $275k.rental prices in phoenix are very deflated right now. during the boom you had a lot of condos that have now been converted to rentals, you have speculators and investors renting, and people like myself who are renting.the supply in the rental market has nothing to do with the basis of my home.

but aren't you "buying" it everyday that you don't sell it for $275k, in a sense? Right now, you can either have the cash, or the condo. With rents at $1100 a month, I don't know how you can justify the numbers if it's an investment property, unless you're expecting it to begin appreciating soon. And I doubt you feel that appreciation is a possibility.

 

[tommyGunZ]

Getting tired of renting yet, TGunz?

way tired. would love to own my own place. but I doubt I'd enjoy it much knowing I was losing 5k a month in equity, so I continue to hold out.

 

[joey]

:BeenReadingThisThreadForTooLongWithoutWhiteCorneringIt:

 

[Gambino]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

 

[TommyGilmore]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

 

[Gambino]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

So you know a lot of real estate experts who are lifelong renters

 

[tommyGunZ]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

 

[Gambino]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

 

[TommyGilmore]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

So you know a lot of real estate experts who are lifelong renters

It's a snowclone.

 

[tommyGunZ]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

I believe you. Lots of subprime borrowers like yourself were able to buy big houses with the banks money the past few years.More power to you. Live it up while you can. When you get that notice of default, the party ends.tick-tock

 

[phthalatemagic]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

OUCH

 

[Gambino]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

So you know a lot of real estate experts who are lifelong renters

It's a snowclone.

If you ever stop at the El Porton off of Exit 13, try the "Number 4"...you'll love it

 

[Gambino]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

I believe you. Lots of subprime borrowers like yourself were able to buy big houses with the banks money the past few years.More power to you. Live it up while you can. When you get that notice of default, the party ends.tick-tock

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

 

[tommyGunZ]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

I believe you. Lots of subprime borrowers like yourself were able to buy big houses with the banks money the past few years.More power to you. Live it up while you can. When you get that notice of default, the party ends.tick-tock

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

Your i-tough guy challenges are amusing. The rest of us are discussing housing issues and data, you come in with "my house is bigger than yours, so you're stupid" arguments. When you have something interesting to discuss, or some actual data to back up your position, I'd love to hear it. Otherwise, take your trolling, internet-gangsta-wannabe drivel elsewhere. You're old, bitter, lame, and no one wants to hear your crap.

 

[Gambino]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

I believe you. Lots of subprime borrowers like yourself were able to buy big houses with the banks money the past few years.More power to you. Live it up while you can. When you get that notice of default, the party ends.tick-tock

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

Your i-tough guy challenges are amusing. The rest of us are discussing housing issues and data, you come in with "my house is bigger than yours, so you're stupid" arguments. When you have something interesting to discuss, or some actual data to back up your position, I'd love to hear it. Otherwise, take your trolling, internet-gangsta-wannabe drivel elsewhere. You're old, bitter, lame, and no one wants to hear your crap.

You realize that virtually nobody who has posted on this board takes you seriously on any issue, right?Lawyer...well sort of, kinda.Real Estate guru...well yea, I rent and I can predict every market perfectly.Sports predictions...you need a homer, I'm your guy. I'll jump on any bandwagon.Pot...NOW WE ARE TALKING

 

[OC Zed]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

I believe you. Lots of subprime borrowers like yourself were able to buy big houses with the banks money the past few years.More power to you. Live it up while you can. When you get that notice of default, the party ends.tick-tock

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

Wow, the tool factor in here skyrocketed within the last couple of hours. Why do you have to be so down on a guy trying to live within his means and save for a house he can afford for the long run?Can you remember starting out just out of school without much money and not yet established in your career? If you were never in that position and always had oodles of money from Daddy or Grandpa, well, then God bless you -- you are a very fortunate person. If you were in that position yourself and worked and saved to get where you are today, encourage and feel good for those of us that are trying to do the exact same thing. Or, if you were in that position and went ahead and bought your house without any money down and with a minimal credit history, then be grateful for the once-in-a-lifetime windfall bestowed upon you for having access to negligently easy credit terms and benefiting from the largest speculative bubble our country has ever seen.In any case, save the toolishness for someone else.

 

[Gambino]

Getting tired of renting yet, TGunz?

Getting real estate advice from a lifelong renter would be like hiring Artie Lange as a personal trainer or getting anger managment counseling from Michael Pittman.

Worst. Analogy. Ever.

Mr Tony-Soprano-wannabe-innerrnet-gansta is what we call a "home debtor", someone who owns a home but is underwater big time. Ignore him and he'll go away.

I know you enjoy this imaginary story that you've made up in your hippie-wannabe head, but the fact is that my house is bigger than the current apartment you live in and the trailer park you grew up in.

I believe you. Lots of subprime borrowers like yourself were able to buy big houses with the banks money the past few years.More power to you. Live it up while you can. When you get that notice of default, the party ends.tick-tock

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

Wow, the tool factor in here skyrocketed within the last couple of hours. Why do you have to be so down on a guy trying to live within his means and save for a house he can afford for the long run?Can you remember starting out just out of school without much money and not yet established in your career? If you were never in that position and always had oodles of money from Daddy or Grandpa, well, then God bless you -- you are a very fortunate person. If you were in that position yourself and worked and saved to get where you are today, encourage and feel good for those of us that are trying to do the exact same thing. Or, if you were in that position and went ahead and bought your house without any money down and with a minimal credit history, then be grateful for the once-in-a-lifetime windfall bestowed upon you for having access to negligently easy credit terms and benefiting from the largest speculative bubble our country has ever seen.In any case, save the toolishness for someone else.

I have no issue with the "guy" you describe, I do have issues with Gunz and his ignorance/arrogance.As for my money, I am very fortunate that I don't have to worry about money, which has always been my goal in life. But rest assured that I earned every dollar of it...although I didn't have to dig myself out of a huge hole to do so.

 

[OC Zed]

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

Wow, the tool factor in here skyrocketed within the last couple of hours. Why do you have to be so down on a guy trying to live within his means and save for a house he can afford for the long run?Can you remember starting out just out of school without much money and not yet established in your career? If you were never in that position and always had oodles of money from Daddy or Grandpa, well, then God bless you -- you are a very fortunate person. If you were in that position yourself and worked and saved to get where you are today, encourage and feel good for those of us that are trying to do the exact same thing. Or, if you were in that position and went ahead and bought your house without any money down and with a minimal credit history, then be grateful for the once-in-a-lifetime windfall bestowed upon you for having access to negligently easy credit terms and benefiting from the largest speculative bubble our country has ever seen.In any case, save the toolishness for someone else.

I have no issue with the "guy" you describle, I do have issues with Gunz and his ignorance/arrogance.As for my money, I am very fortunate that I don't have to worry about money, which has always been my goal in life. But rest assured that I earned every dollar of it...although I didn't have to dig myself out of a huge hole to do so.

The only ignorance/arrogance I've seen on here lately is from a guy touting the virtues of his plush pad off of the Turnpike. Congratulations. Exchanging information and debating issues which are very relevant to millions of people across this country is ignorant and/or arrogant? Seriously, I don't get it.

 

[Gambino]

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

Wow, the tool factor in here skyrocketed within the last couple of hours. Why do you have to be so down on a guy trying to live within his means and save for a house he can afford for the long run?Can you remember starting out just out of school without much money and not yet established in your career? If you were never in that position and always had oodles of money from Daddy or Grandpa, well, then God bless you -- you are a very fortunate person. If you were in that position yourself and worked and saved to get where you are today, encourage and feel good for those of us that are trying to do the exact same thing. Or, if you were in that position and went ahead and bought your house without any money down and with a minimal credit history, then be grateful for the once-in-a-lifetime windfall bestowed upon you for having access to negligently easy credit terms and benefiting from the largest speculative bubble our country has ever seen.In any case, save the toolishness for someone else.

I have no issue with the "guy" you describle, I do have issues with Gunz and his ignorance/arrogance.As for my money, I am very fortunate that I don't have to worry about money, which has always been my goal in life. But rest assured that I earned every dollar of it...although I didn't have to dig myself out of a huge hole to do so.

The only ignorance/arrogance I've seen on here lately is from a guy touting the virtues of his plush pad off of the Turnpike. Congratulations. Exchanging information and debating issues which are very relevant to millions of people across this country is ignorant and/or arrogant? Seriously, I don't get it.

If you consider "Gunz Speak" intellectual quality material, then by all means enjoy. Hell, people eat cat food...so to each their own.I would be surprised if this thread fixes any problems "millions of people" are facing, but if so all the better.

 

[Sonny Lubick Blowup Doll]

I sort of "know" both Gambino and TgunZ. Not sure how it got so bad, I actually think they'd get along in real life, but whatever. Ah, the internet...

Anyway, no need for more personal attacks, we get it. The thread is a good one.

 

[BassNBrew]

http://www.oftwominds.com/blogapr08/RE-bottom4-08.html

Want to Know When Housing Has Bottomed? Here's How

April 23, 2008

The shills and cheerleaders are already calling the "bottom" in housing prices. It's worth recalling that these are the same Nostradamuses who declared the last "bottom" in 1991, 1992, 1993, 1994, 1995 and 1996--and voila, they were finally right seven years into the slide (1997).

Want to know when the "bottom" is finally in? The "bottom" will be close when buying real estate make sense as a sound business proposition. This kind of foreclosed/distressed property is not even close to being a decent business proposition:

What's a sound business proposition? making a profit from day one, without the aid of any tax shenanigans. At the real bottom in real estate cycles, you can buy a house or apartment and rent it out at market rates--and make a profit on day one in cash-accounting terms.

If you can't rent the property out for a profit from day one, it isn't the bottom.

Untold numbers of inexperienced speculators bought homes with the untested notion that they could "rent it out" ("buy to let" in the U.K.) if flipping it for vast profits didn't work out. Let's go through the actual expenses of an absentee landlord/owner:

1. down payment. The down payment isn't "free": you could be earning 3% or so in a money market/T-bill. As pathetic as that is, it's not zero. If the down payment isn't earning more than 3%, then why bother buying real estate?

2. mortgage/borrowed money. This is self-evident. But wait--there's more!

3. property management. Even if you do it yourself, it's not "free"; nobody's time is free. The standard fee is abour 5-6% to handle the rental and collect the rent. This does not cover gardening, upkeep, repairs, etc.--those are extra. Plus somebody has to respond to tenant complaints. That's not free, either.

4. property taxes. Like weeds, these just grow constantly. Don't forget the special assessments.

5. advertising/marketing. Sure, craigslist is free--but somebody has to meet prospective tenants, process their rental applications, check their credit, etc. Maybe that's included in your property management fee, maybe not.

6. auto/truck expenses. hauling stuff to the dump and driving to Lowes/Home Cheepo isn't free.

7. cleaning and maintenance. When the tenant moves out, the place isn't perfect, no matter what you hope/what the lease says. (And how good is that lease, anyway? Better add a couple hundred bucks for attorney's fees if you're smart.)

Ah, maintenance. That covers quite a few costly items: appliances that die, carpets that wear out, hardwood floors stained by cat pee/soggy house plants, furnace filters, paint that gets grimy, etc. Many pros figure 10% of the rent goes (eventually) to repairs/maintenance. If you stipulate the tenant takes care of the yard, be prepared to own a slum.

8. Insurance. It's nice if you could get homeowner's coverage, but you can't--your rental is a commercial property. Now you need liability coverage, too, not just fire insurance. Nothing like a tenant "tripping on the broken concrete" to remind you of that.

9. repairs. A building is a living thing which breaks down over time--expecially if it's a cheaply built, poorly constructed McMansion/condo. Windows break, paint peels, roofing leaks, flashing rusts, stairs rot, crummy veneer flooring delaminates, the list is endless.

10. utilities. Many landlords pay for water, but maybe you won't.

11. fees and licenses. Your city or county probably wants some business license fees from your landlording business. One way or another, there's sure to be some fees or licensing costs somewhere. Maybe the city inspects the property for safety--and bills you. Some agency or municipality is sure to assess you something beyond property tax.

12. Vacancies. Yes, some premium properties are rarely empty, but don't fool yourself--the pros know vacancies are a fact of rental real estate life. Most figure 5% (for premium properties) to 10% (for less than premium).

OK, so let's say a rental property rents for $1,500/month in the real world. In my neck of the woods, this would be a small 2-bedroom, 1-bath bungalow. Maybe in your area, it would be a 4-bedroom, 2-bath home. Regardless, the key is to add up the real-world expenses and see if owning the property pencils out as a business proposition.

Due to variations in property tax rates, it's difficult to set a generic cost to owning a house. And of course, the property tax drops along with the value of the property.

To keep things simple. let's say the rental costs $300,000 and the owner bought it with no down payment. According to zillow.com's mortgage estimation tool, a $300K mortgage at 6% (30-year fixed-rate) costs $2,124/month or $25,500 a year.

A rough guesstimate of all the non-mortgage expenses listed above for a $300K property comes to between $8,000 and $9,000, so let's take the lower number. (Insurance and other costs vary widely, too.) $8K + $25K = $33K in expenses against $18K in annual income. A $15,000 per year loss is not a good business proposition.

So let's lower the price to $200,000. The mortgage drops to $18,000 a year, and the lower valuation shaves $1,000 off the property tax. So $7K + $18K = $25K versus an annual income of $18K. A $7,000 annual loss is a lousy business proposition.

So let's drop the price down to $150,000. The mortgage drops to $1,224/month or $14,600 annually. Let's shave another $1,000 off the property tax (too bad for the city/ county depending onrising property tax revenues) and assume all non-mortgage expenses can be reduced to $6,000 per year. $14.5K + $6K = $20.5K versus $18,000 rental income: we're down to a $2,500 annual loss.

So let's ratchet the pruchase price down to $130,000. Now the mortgage is only $13,000 a year and the non-mortgage expenses, well let's say they're down to $5,500 a year. $13K + $5.5K = $18.5K against $18K in rental income. Hey, we're finally getting close to breakeven here. An actual, honest profit is just around the corner.

So let's assume a purchase price of $126,000 for the house which rents for $1,500 per month ($18,000 a year). Now at long last we can anticipate a modest profit--unless of course the property sits vacant more than a few weeks out of the year.

Real estate investment pros have a rule of thumb for establishing fair value of rental property. Multiply the annual gross rental by between 6 and 10; that gives you a "business" estimate of the value of the rental. In not-so-great neighborhoods, a multiple of 6 is standard; a house that rents for $18,000 a year would thus be worth $108,000. A moderate neighborhood would fetch a multiple of 7--magically, our $126,000 number. Premium neighborhoods (where it is presumed you can raise the rents) may be worth 8 to 10 times gross annual rents.

So even in a wonderful neighborhood with terrific schools and other assets, a house renting for $18,000 a year is worth no more than $175,000--as a business proposition. Of course you can pay more, but you're paying for "blue sky," not an asset that can be sold on the open market as a business proposition.

There are many other variables, of course; if interest rates climb, then the cost of the property has to decline further to make investment sense. Nonetheless, we can say with great historical accuracy that housing of any sort which can be purchased for a multiple of 6 or 7 is a sound investment. History suggests that only when properties are selling for these low multiples can we discern the "bottom."

And when will that occur? If we look at the chart of mortgage re-sets, we see the non-subprime re-sets really start rising in 2009 and keep increasing all the way through 2011 before finally falling off in 2012. Since we can also anticipate the recession will be neither shallow nor short, there are ample reasons to expect the inventory of unsold homes to rise in inverse proportion to the number of qualified, willing buyers. What does an oversupply of merchandise (houses) and a dearth of demand/buyers lead to? Falling prices.

It's easy to multiply a number by 7. That big house down the street that rents for $3,000 a month/$36,000 a year? At the real "bottom," that house will sell for about $250,000 (or less). That condo which rents for $1,200/month/$14,000 a year? $100,000, tops. And so on.

Can real estate decline in value? Yes. At what point does it make sense to buy real estate as an investment which bests other business opportunities? When it makes a profit on day one, after all expenses, not just mortgage/property tax/insurance. And what's a time-tested method of figuring that price? Seven times gross annual rental income.

Calling the bottom won't be that difficult; it requires only patience and simple arithmetic.

One caveat: if a property can't be rented at any price, its value is essentially zero.

lolthat is the worst article in real estate i have ever read.

seriously.

Interesting...I think it's one of the best that I've read. Been using a similiar model for years and none of my clients that chose to listen are upside down and all are cash flowing. Mike Anderson has used it to build a small kingdom and quit his primary job. That said, I do think rents are artificially depressed right now from this bubble so you have to account for that in your investment decisions.

 

[BassNBrew]

I've challenged you before, and it is tired. I have a 30 year fixed mortgage at 5.25% with considerable equity. So I don't know why you continue to amuse yourself by assuming that everyone is "subprime". Meanwhile, you can't work in the field that you studied, and live in an apartment with hippie-wife and listen to Widespread Panic downloads.You are shopping for new bongs, and I'm thinking that this dip may actually allow me to buy a mountain vacation/rental property that I can retire to someday.But by all means, keep patting yourself on the back

Wow, the tool factor in here skyrocketed within the last couple of hours. Why do you have to be so down on a guy trying to live within his means and save for a house he can afford for the long run?Can you remember starting out just out of school without much money and not yet established in your career? If you were never in that position and always had oodles of money from Daddy or Grandpa, well, then God bless you -- you are a very fortunate person. If you were in that position yourself and worked and saved to get where you are today, encourage and feel good for those of us that are trying to do the exact same thing. Or, if you were in that position and went ahead and bought your house without any money down and with a minimal credit history, then be grateful for the once-in-a-lifetime windfall bestowed upon you for having access to negligently easy credit terms and benefiting from the largest speculative bubble our country has ever seen.In any case, save the toolishness for someone else.

I have no issue with the "guy" you describle, I do have issues with Gunz and his ignorance/arrogance.As for my money, I am very fortunate that I don't have to worry about money, which has always been my goal in life. But rest assured that I earned every dollar of it...although I didn't have to dig myself out of a huge hole to do so.

The only ignorance/arrogance I've seen on here lately is from a guy touting the virtues of his plush pad off of the Turnpike. Congratulations. Exchanging information and debating issues which are very relevant to millions of people across this country is ignorant and/or arrogant? Seriously, I don't get it.

If you consider "Gunz Speak" intellectual quality material, then by all means enjoy. Hell, people eat cat food...so to each their own.I would be surprised if this thread fixes any problems "millions of people" are facing, but if so all the better.

He may be the ultimate fade in the sports world, but he nailed it this thread time and time again.